With more than 800 exchange traded funds (ETFs) and exchange traded notes (ETNs) to choose from, just how does one know which one to choose? We found a great checklist of things to consider before diving in an making the purchase.
Paul Amery of Index Universe listed some things to consider when choosing an ETF, and we’ve added some of our own points of consideration, as well:
1. Choosing between an ETF or ETN. First one must understand the differences between them. ETFs are funds traded on an exchange, and if one closes, there are protections for investors in place. ETNs are backed by the credit of the issuer, meaning if the issuer goes belly-up, the holder of the ETN could be out of luck.
2. What’s in the index? For example, with commodity ETFs, does it hold the physical commodity, futures, companies that produce the commodity? Don’t just go by names – look deeper to see how the ETF is put together.
3. Know the costs of the ETF. One must consider total expense ratios and if an active trader keep in mind second market liquidity and bid-ask spreads.
4. Is it closing time? Although many ETFs have recently come onto the scene, a number of them have closed for one reason or another. Be on the lookout and consider funds with high trading volume and high assets to ensure liquidity.